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Theme 2.2 economic analysis

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Theme 2.2 economic analysis

  1. 1. 2.2. The economic environment
  2. 2. Class Objective Know the importance of economic analysis Major dimensions of international economic analysis Macroeconomic indicators Types of economic systems Economic freedom
  3. 3. 2.2.1. The importance of economicanalysis Every country has its own economic development From 1975 to 2008, world economic output has tripled 2009: registration of worse economic contraction since WWII Reduction of 30% of exportation in 2009
  4. 4. 2.2.1. The importance of economicanalysis Globalization: countries are interrelated to each others directly or indirectly World Bank database identifies 208 discrete economic environments  194 countries and 14 others with more than 30 000 inhabitants Thumb rule: invest in economies with the greatest return and the least risk Managers have to understand, anticipate and adapt constantly the company to economic environment.
  5. 5. 2.2.2. The elements of economicenvironment GNI: Measure of income generated by both domestic production as well the production at international level of a national company. GNP: all goods and services produced + income earned by citizens abroad - income earned by foreigners from domestic production GDP: Total value of all final goods and services produced within nation’s border whether the company is national or not.
  6. 6. 2.2.2. The elements of economicenvironment GNI, GNP and GDP per capita  Division of production by the number of inhabitants.  Comparison of relative economic performance of countries  Cases of high income countries with few economic activities: KSA, Kuwait, Algeria, etc.
  7. 7. 2.2.2. The elements of economicenvironment GNI rate of change: good indicator on a potential of an economy measured with the rate of population growth. GNI and the Purchase power of parity: GNI does not tell the cost of living.  1$ in New-York does not buy the same amount of products in Mumbai  PA x S = PB  The Big Mac index
  8. 8. 2.2.2. The elements of economicenvironment Degree of human development: Alternative to monetary indicators.  HDI from UN have three main dimensions  Longevity  Knowledge  Standard of living: GNI per capita ajusted with PPP
  9. 9. 2.2.2. The elements of economicenvironment Inflation: Sustained rise of price that is measured against a standard level of purchasing power. It has a influence on:  real interest rate, exchange rate, living costs, general economic confidence, and political stability  On cost of living: lose of purchase power  Hyperinflation: Difficult to make long term plan of investment. Give no incentives to save and investments instrument become speculative.  Deflation: Opposite of inflation when price variation rate is less than zero. USA and Japan
  10. 10. 2.2.2. The elements of economicenvironment Unemployment  High unemployment rate make a risky business environment.  Long term unemployment depress economic growth, create social pressure and political instability  Indicator for efficiency in human resource management in a country  Careful with underestimation of unemployment…  Variation in public support  The pension problem: Canada, USA, Europe, Japan
  11. 11. 2.2.2. The elements of economicenvironment Debt  Larger is debt the more uncertain is the country  Short term perspective: Money goes to payment of interest and not on more productive use  Long term: preocupation of future generation’s ability to pay  High debt = tax increase, reduced growth, rising inflation
  12. 12. 2.2.2. The elements of economicenvironment Income distribution  Gini coefficient: measure of degree of inequality in the distribution of family income in a country. 0 perfect distribution 1 perfect inequality.  Higher rate indicate an economic and social inefficiency which cause higher crime, corruption, political risk, etc.  Higher rate also limit a potential market that can be consumers.
  13. 13. 2.2.2. The elements of economicenvironment Limit of Gini coefficient and poverty  Extreme case of India: has 36.8 and USA has 46.3 but India has 80% of its population living with less than 2$ per day.  Poverty according to World Bank: 80% poor, 10% middle income, 10% rich.  In extreme poverty market may not existm national infratructure absent, higher criminal behavior, etc.  However, managers see a good potential in poor markets. Ex: Tata car 2100 USD and Tata house 800- 15000 USD
  14. 14. 2.2.2. The elements of economicenvironment Labor cost: Cost of labor may be a key element for total cost of product The balance of payment: System recording all of a country’s economic transactions with the rest of the world over a one year period.  Used by managers to assess a country’s economic stability and also financial stability.
  15. 15. 2.2.2. The elements of economicenvironment  The components of BP  Current account  Value of export and imports of physical goods  Receipt and payments for services: banking or advertising and other intangible goods (invisible trade)  Private transfers (remittances and other business transfer)  Official transfers like international aid  Capital account  Long term capital flows (investments in foreign firms or profits from selling investments)  Short term capital flows (money invested in foreign currency, funds, etc.)
  16. 16. 2.2.3. Integrating EconomicAnalysis Logically high income markets are the best foreign markets  1 bilion person = 80% of world wide consumption However managers see a potencial in emerging markets with teir accelerated growth.
  17. 17. 2.2.2. Integrating EconomicAnalysis Types of economic systems  Market economy: free market  Command economy: centrally planned  Mixed: Most economies today, promote free market but there is a part of government intervention.  Types of interventions government intervention  Influence on private production and consumption decisions  Redistribution of income and wealth
  18. 18. 2.2.2. Integrating EconomicAnalysis The dynamic of economic transitions  Belief in free markets  Economic freedom index (Heritage foundation and WSJ)  Def: The absence of government coercion or constraint on the production, distribution or consumption of goods and services beyond the extent necessary for citizens to protect and maintain liberty itself.  The index indicates the level of free economic choice and enterprise.
  19. 19. 2.2.2. Integrating EconomicAnalysis  The expanding role of the state  State intervention more present since 2008  USA: Obama fires GM CEO and inject money in banking system  Signals of transition to market or command economy  Privatization or government acquisition  Regulation: restrictions on free operations of markets and business  Property right: protection support a competitive economy  Fiscal and monetary reform:  Anti-trust laws: eliminate monopolistic behavior
  20. 20. Thank you! Questions?